Facebook IPO averts "odd lot" question

May 18, 2012|Herbert Lash | Reuters

(BRENDAN MCDERMID, REUTERS)

NEW YORK (Reuters) - Facebook Inc's modest debut on Friday may have averted a potential headache for the company and regulators, and kept at bay a debate over the role of "odd lots" in the marketplace.

Shares of Facebook traded as high as $45, near the price of $50 that would keep many retail investors from placing a typical "round lot" order of 100 shares, because the total cost will be $5,000 - considered a threshold for many investors.

By the end of regular trading on Friday, however, the stock closed at $38.23, just 23 cents, or 0.6 percent, above its initial public offering price.

An order for less than 100 shares is called an odd lot. Two decades ago, this was a forgotten corner of the retail marketplace that accounted for less than 1 percent of trades. But odd lots may account for almost a quarter of trading now, according to one sampling of 120 securities provided for academic research.

Orders can be placed for any number of shares, but odd lots are not reported or displayed on a consolidated feed of all stock transactions. This lapse calls into question whether all market activity is accurately reflected, raising issues of transparency regarding price discovery.

The surge in odd-lot trading has been driven by the higher cost of round lots in such popular stocks as Apple Inc, Google Inc and Priceline.com, and their increased use by high-frequency traders in information-gathering strategies that many institutional investors find abusive.

For example, a high-frequency trader may "ping" 10 trading venues with a sell order of 20 shares each. If five orders execute, the trader may deduce a large buyer is present. The trader will then cover the other five orders, buy shares in the market in front of the large buyer and then sell that stock to the buyer at a slightly higher price.

One trader at an asset management firm said he suspected the main reason high-frequency traders transact in odd lots is to assess buy and sell imbalances in the market without taking on too much risk or leaving a footprint in the public stock feed.

Because "any increase in average trade size won't benefit the high-frequency trading model, the HFT community probably does not want too much attention on the increase in odd-lot trading," said the trader, who spoke on condition of anonymity.

Maureen O'Hara, a Cornell University professor who is an expert on market microstructure, does not believe trading in odd lots is abusive, but said it does raise issues of fairness.

"More than half of all the trades in Google are never reported on a tape that is publicly available. That's pretty appalling in my view," O'Hara said. "The fact that so many trades are odd lots means that somebody should be reporting these trades in a way that the market can see them."

MINI-OPTIONS FOR POPULAR HIGH-PRICED STOCKS

High stock prices have raised another issue among investors who trade in odd lots: the inability to hedge their holdings with stock options on less than 100 shares. NYSE Arca and the International Stock Exchange have proposed "mini-options" that would represent 10 shares of a stock, instead of a round lot.

Both NYSE Arca and ISE selected Apple, Google, Amazon.com and SPDR Gold Shares, an exchange-traded fund, for their mini-option proposals in April to the U.S. Securities and Exchange Commission.

NYSE Arca also picked SPDR Standard & Poor's 500, an ETF that reflects the S&P 500 index, while ISE chose International Business Machines Corp and Priceline.com.

The SPDR S&P 500 ETF, at about $130, trades at the lowest price of the seven securities, while Google and Priceline trade at more than $600 a share.

TD Ameritrade, a brokerage unit of TD Ameritrade Holding Corp, said odd lots account for at least 69 percent of trading of the securities proposed for the mini-options.

Certain popular stocks trade at prices beyond the reach of the typical retail investor, said TD Ameritrade in a letter to the SEC about NYSE Arca's and ISE's proposals.

When prices increase above $50 there is a corresponding increase in the amount of odd lots that trades, the firm said.